Decline in oil prices to cushion PkR/USD parity

While the exchange rate stumbled more than expected (3.6% since May-12), continued volatility can be expected until clarity emerges on foreign flows, in our view.

In this backdrop, we highlight that global growth slowdown looks imminent but flag the recent cut in Arab light price forecast by our commodity team as a key positive.

We cut our FY13E oil import estimate by ~US$1bn to US$15.4bn (now only +1% YoY), adjusting for downward revision in average oil price (-5% YoY) forecast by BofAML.

Incorporating adjustments and current trends, we expect PkR to depreciate by 5.7% in FY13E based on current account expanding to US$4.5bn in FY13E.

However we believe (1) adequate reserves to repay loan to IMF in FY13E and (2) potential relief in the form of CSF flows should ease off near-term sentiments and hence the currency, before resuming its mid-term devaluation path, in our view.
(KASB)

Decline in oil prices to cushion PkR/USD parity

APL ; Strong dividend yield to trigger the stock price

Since the announcement of its 9MFY12 result, the stock of Attock Petroleum Limited (APL) has remained dull, underperforming the benchmark index by 0.2%. This is mainly on account of below expectation profitability in 3QFY12 as lower exports, not only curbed revenue but resulted in 4.3 percentage points higher effective tax rate during the quarter. In addition to this, falling crude oil prices (down by 16.3% since April 2012) have also played down on the oil stocks. We are of the view that the market has over played these developments as strong fundamentals like aggressive volumetric growth, integration with group refineries and healthy payouts are still intact. In the short term however, removal of ban on exports to NATO and a strong final dividend can be the price triggers. Our DCF based December 2012 target price for the scrip works out to PKR 496/share, offering an upside of 11.5%, thus we recommend Buy.

Strong final dividend can trigger the stock price
We have witnessed above expectation interim dividend payout not only for APL but all the Attock Group Companies, excluding National Refinery Limited (NRL), which seldom pays interim dividend. This is hinting towards the possibility Group’s philosophy of gearing up its payouts going forward. We have a final dividend expectation of PKR 32.5/share, taking full year’s payout to PKR 50/share, translating into dividend yield 11.2%, highest among the OMCs. This strong dividend paying ability of APL makes it our top pick among the listed OMCs, a sector categorized by the cash constraints due to the uncertainty of circular debt shrouding the whole energy chain.

Profitability improves by 14% YoY in 9MFY12
Despite suffering a 17% QoQ earnings contraction, APL managed to improve its profitability by 14% YoY in 9MFY12. This was mainly on account of strong growth in retail fuel segment where HSD and MS witnessed a YoY rise of 71.7% and 48.7%, respectively. This resulted gross profit to post a YoY growth of 37% in the period under review. Income on bank deposits suffered a YoY drop of 12% due to lower cash balances as the company had to invest in increasing working capital requirement due to rising inventory levels. QoQ comparison however reflects a complete opposite picture, where a 14% volumes drop in HSD and lower realized margins led to fall gross profit by 10%. Falling cash balances along with decline in interest rates also dented income on deposits by 20% QoQ.
(AH)

APL ; Strong dividend yield to trigger the stock price

CHERAT CEMENT COMPANY-9MFY12 Review

Positive change in earnings
Cherat cement company reported impressive earnings during 9MFY12 with the PAT coming in at PKR 193m (EPS: PKR 2.02) as compared to net earnings of PKR 15m (EPS: PKR 0.16) in the corresponding quarter last year. 3QFY12 earnings clocked in at PKR 104m (EPS: PKR 1.08) as against a meager PAT of PKR 4m (EPS: PKR 0.04) during 3QFY11.

Higher dispatches and increasing cement price improve margins
The sales growth during 9MFY12 grew by 20% YoY reaching PKR 1.25bn over the sales revenue of the same period last year. Total cement dispatches grew by 5% YoY during the nine months of FY12, this coupled with higher prices of cement contributed to the higher sales during 9MFY12. Local sales volume during 9MFY12 increased over the same period last year whereas exports dispatches experienced a YoY decline during the same period. Gross margins remained robust during the first nine months of fiscal year, 2012, with the gross margin during this period jumping to 18% as against 12% during 9MFY11. Operating margins also increased to 14% during 9MFY12 vs 7% during 9MFY11. Net margins showed significant improvement by moving to 5% during nine months of FY12 as compared to 1% during the same quarter last year.
(Taurus)

CHERAT CEMENT COMPANY-9MFY12 Review

FY13 Budget : Cements to benefit the most

Present review of FY13 budgetary measures supporting the cement sector of Pakistan, along with their impact on our sample universe companies coupled with outlook and recommendations on the same.

Better PSDP utilization to keep cement demand solid
The government has allocated Rs873bn in budget FY13 for Public Sector Development Program (PSDP), earmarking a total of Rs873bn (Rs360bn for Federal and Rs513bn Provincial). Due to having the pre-election year, we expect this time around, the government will be making enough efforts to utilize around ~50-60% of the total PSDP allocation against the historical utilization levels ranging from 24% to 40% witnessed during the last four years with increasing resource constraints. Therefore, this time around, we expect the demand of cement to remain firm during FY13 owing to greater utilization of the PSDP funds (infrastructure portion holds 55% of the total PSDP while Social sector makes up about 38%).

Federal Excise Duty (FED) reduced by Rs100/ton to Rs400/ton
With the government planning to gradually phase out FED on the Cement sector by FY14, the FED has been slashed by Rs100/ton to Rs400/ton in the budget FY13. Though lower, this reduction came in line after Rs200/ton made last year to Rs500/ton. As cement profitability varies with other more influencing factors i.e. coal/fuel prices and interest rates, we do not expect any impact on cement volumes due to this reversal in FED (only Rs5 per bag impact).

Custom duty on scrap of rubber/shredded tyres reduced to 10%
The shredded tyres are another alternate fuel for cement manufacturers in place of coal, therefore, reduction in import duty in shredded tyres bodes well for the cement sector. The big players in particular, LUCK and DGKC, and the whole sector in general, will reap the maximum benefit from this reduction in the duty. In case of increase in coal prices the maximum benefit will be for these two giants, as both of them have successfully implemented Tire Derived Fuel (TDF) and Reduce Derived Fuel (RDF) technology at their plants. LUCK has already converted ~20% of its plant on TDF and RDF, which would result in estimated savings of around Rs292mn (EPS impact Rs0.57) in FY13 for the company. On the other hand, a trial run has already taken place at the DGKC plant and is expected to be operational in 1HFY13.

Outlook and recommendation: ‘Overweight’
After reviewing the above measures, we believe that the on-going year will be more eventful with respect to infrastructure development and, thus, entails further positivity for the cement industry of Pakistan. As per FY13 valuation perspective, the impact of FED reduction on our sample companies provides a sufficient upside potential from current levels. However, at current levels, we recommend our investors to 'Overweight' DGKC and FCCL and 'Marketweight' LUCK with Jun-12 target price of Rs48, Rs8.10 and Rs129 respectively.
(InvestCap)

FY13 Budget : Cements to benefit the most

Monetary Policy: Indicators still Favoring Wait and See

SBP will opt for a wait and watch approach and hence discount rate will remain at 12% in upcoming MPS    Inflation averaging at 11% during 11MFY12, fall in fuel price and money supply growing at 10% will allow SBP not to change its view on monetary policy    The risk of double digit inflation in FY13 stems from reliance on domestic banking system, expansionary budget ahead of election year and expected breach of subsidy targets    As per our estimates inflation during FY13 will remain in between 11.3% to 12.3%    With USD2.6bn to be repaid to IMF against SBA program during FY13, balance of payment situation would remain under check. The resultant depletion of reserves would weaken PKR and offset the benefits of decline in fuel oil prices    Given uncertainty over foreign flows, government would be bound to rely on domestic sources for funding its fiscal operations. Amid consequent inflationary outcome of the same, change in monetary stance during 1HFY13 cannot be ruled out

Monetary Policy: Indicators still Favoring Wait and See

Status Quo to be maintained

The State Bank of Pakistan (SBP) is scheduled to release the last Monetary Policy Statement (MPS) for FY12 on June 8, 2012. We expect the SBP to maintain a status quo with keeping the discount rate at 12%. The central bank has kept the policy rate unchanged since Nov-11.

Rise in May-12 inflation not overtly worrying
Inflationary pressures that were high at the beginning of FY12 have remained at relatively contained (albeit rising) levels during much of the 2HFY12, with January to April monthly inflation peaking at 11.3%. Only in May-12 did the CPI breach the 12% mark, and was recorded at 12.3%. Since the upcoming Monetary Policy Statement is going to be the first of FY13’s, and with an annual inflation target of 12%, we believe that SBP is likely to adopt a ‘wait-and-see’ approach rather than a ‘preemptive’ one. FY12’s expected average inflation of 11.1% falls well within SBP’s inflation target of 12% for the current fiscal year. Moreover, even though inflation has been heading north in recent months, it is pertinent to note that non-food inflation, which stood at 13% in May-12, has been the major driving force behind last month’s inflated CPI figure. The rise in non-food inflation primarily occurred at the behest of a hike in power tariff (of up to 16%). SBP has traditionally been more responsive to food price hike than to any other component. Along with this, we believe that SBP will also be factoring in the recent decline in international food and commodity prices (Arab Light oil price has come down from a high USD 126/bbl in Mar-12 to an 18-month low of USD 94/bbl) in the upcoming MPS, which will be yet another factor working towards the retention of discount rate at the current level.

Narrowing Current Account deficit yet another reason to hold rates
Even though the country’s current account has remained in the negative territory in FY12, its severity has been on a declining trend for most of the year. Although Apr-12’s current account deficit of -1.6% registered an increase over 3QFY12’s average of -1.1%, falling international commodity prices (in particular oil), should prevent SBP from basing any rate hike decision on the negative C/A balance alone.

High level of deficit monetization and PKR depreciation some key risks
We flag the high levels of government borrowing from the central banks as one of the key risks to our stance. Thus far in FY12, GoP has borrowed PKR 405bn (PKR 195bn in 4QFY12TD alone) from the central bank, which is a textbook indicator of rising inflation in the coming months. Such an eventuality would provide the SBP a justification to increase the discount rate in future monetary policies. Another factor which is working towards a rate hike is the inability of the government to meet its T-Bill auction target(s) in four out of the five auctions held in 4QFY12, suggesting market participant’s ‘desire’ for higher rates. Also, exchange rate has depreciated by almost 3.8% in 4QFY12, a factor which the monetary authorities would be watching closely.
(AH)

Status Quo to be maintained

Sector Update – Cement

Coal at 20-month low
Coal prices continue to slide further, breaching the USD 90/ton threshold since the start of the month. From the start of the quarter, coal prices have decline by a substantial 14% hovering around USD 89/ton. The decline in coal prices has started to accrue benefits to manufacturers as many manufacturers have started to hold less coal in inventory and place frequent orders of coal to accrue timely benefits of the declining price trend. Coal prices have come under pressure due to global supply overhang coupled with reduced demand in the North American region.

FED reduction, short of expectation
The government reduced FED by PKR 100/MT, to PKR 400/MT in the budget FY13. In the last budget the government reduced FED by PKR 200/MT and voiced its opinion to reduce FED by PKR 200-250/ton in FY13. Although the reduction in FED in this year's budget was less than expected, it stills bodes well for the sector. We expect the reduction in FED will have a meager impact of PKR 5/bag, which will be passed on the consumer. As a result we could see cement prices declining by PKR 5/bag on account of said pass on.

Duty on imported rubber reduced
Import duty on rubber scrap and shredded tire which is to be used as fuel has been reduced from 20% to 10%. This decline in import duty only benefits those manufacturers who currently have a RDF facility operational at their plants. In recent years tire or rubber scraps have been used to replace ~ 15-20% of coal used in kilns. Some manufacturers have been using rubber scraps with a mix of other recycled fuels to substitute the amount of coal used, the major impact of the duty reduction would accrue to LUCK which has a TDF facility which primarily uses tire and rubber scraps inputs to replace coal.

GIDC to hit the cement sector
GIDC has been increased by PKR 87/mmbtu on captive plants. Cement manufacturing requires ~100Kwh to manufacture 1MT of cement; many manufacturers have captive power plants at their manufacturing facilities. The said hike in GIDC would increase the cost of internal power generation by ~PKR 1.26Kwh keeping other factors constant. Taking industry average, this would increase cost of production by PKR 126/MT, which can be easily passed on with a price increase of PKR 5-10/bag.

Valuation
We recommend BUY for LUCK and DGKC with a Dec12 TP of PKR 139/share and PKR 48/share respectively. At current levels LUCK offer a dividend yield of 4% with a potential upside of 11% trading at FY12&13 PE of 6.0x and 5.3x respectively. DGKC is offering a potential upside of 17% currently trading at FY12&13 PE of 5.9x and 5.2x respectively.
(GLOBAL)

Sector Update – Cement